Funding Mass Transit: Economics and financing of UMT projects

Economics and financing of UMT projects

Urban mass transit (UMT) is a highly capital-intensive segment with high economic internal rates of return of 22-25 per cent and low financial rates of return of around 3.5 per cent only. This results in the segment being funded mainly by the central and state governments (and in some instances, urban local bodies [ULBs]) along with debt financing from various multilateral funding agencies.

However, there always remain funding constraints for metro rail projects as these projects put a heavy burden on the developers in the form of loan repayment and interest payment, and a high opportunity cost of government funds. Also, the low financial return often impedes private investment in such big-ticket projects as the social welfare component in UMT projects outweighs the typical business considerations such as profits. The funding issues for bus rapid transit (BRT) systems are also similar though these projects entail much lower investments than metro rail or other modes of transport.

Mounting operational losses and innovative funding mechanism

The major source of income for UMT projects is farebox revenue, which is the total fee paid by commuters for using the public transport service. However, due to low fares, these revenues alone are not sufficient to cover the operating costs. At the same time, fare hikes carry an imminent threat of ridership loss, significantly affecting revenue generation. As a result, the operators suffer huge operational losses on UMT projects.

Owing to mounting operational losses and increasing capital expenditure requirements in the UMT segment, the central government, in the Metro Rail Policy, 2017, has mandated a private investment component and the use of innovative forms of financing to mobilise resources for metro rail projects. These financing options include advertising, value capturing financing, leasing of space, property development, issuance of corporate bonds and green bonds, and transit-oriented development. Besides, a permanent fare fixation authority has also been proposed to be set up for each state to ensure timely fare revisions.

In line with these strategies, metro rail corporations in Delhi, Bengaluru, Gurugram and Lucknow have already started to benefit from the generation of non-fare revenue. For instance, the Delhi Metro Rail Corporation has recorded a substantial increase in the non-fare revenue from Rs 3.88 billion in 2015-16 to Rs 4.14 billion in 2016-17. Besides, non-fare revenue collections of Rapid Metro Rail Gurgaon Limited account for over 50 per cent of the total revenue. These solutions have helped metro rail corporations achieve operating profits.

Further, Nagpur Metro has proposed the increase of stamp duty by 1 per cent for funding the project. It has also planned to exploit its land for commercial and residential purposes in order to generate revenue. Another innovative funding approach being used by Bangalore Metro Rail Corporation Limited involves the signing of MoUs with private companies for station infrastructure development. The corporation has already signed MoUs with three companies – the Embassy Group, Intel Technology and Infosys Foundation – for constructing metro stations at Kadubeesanahalli, Bellandur and Electronics City in Bengaluru.

These financing options are being leveraged for developing BRT systems as well. For instance, the municipal corporations of Pune and Pimpri-Chinchwad have proposed the setting up of an urban transport fund for financing UMT projects. The fund will be financed through the revenues generated from capturing value from beneficiaries in the project influence zone, providing additional floor space index (FSI) in metro and BRT corridors, developmental charges, etc. Also, since ULBs play a considerable role in funding BRT and metro rail projects, municipal bonds are also being used for funding these projects.


Even though the economics of the UMT segment is challenging, new and innovative forms of raising funds and generating revenue have proved to be highly beneficial. Though the operating cost of metro projects continues to be very high, metro rail corporations have now found various means to boost their revenues, instead of depending solely on fare hikes, in order to cover these expenses. Besides, various other means are also being captured for reducing the increasing operating expenses, such as cost optimisation, improved energy efficiency, completion of projects in a defined timeframe, etc.

Even as the government and multilateral agencies are likely to remain dominant financiers in the UMT segment, private investment is also expected to increase owing to introduction of new implementation models to increase private participation. Collectively, these efforts, it is hoped, will meet the financing gaps by reducing dependence of corporations on government allocations, and will also ensure the financial sustainability of UMT projects.